INTRODUCTION AND
SUMMARY OF
CONCLUSIONS AND
RECOMMENDATIONS
1. The Inland Revenue (the Department) carry
out compliance reviews to check that employers are properly calculating
income tax and national insurance contributions in respect of
their employees and are paying over to the Department the amounts
due. In 1995-96, the Department received some £105 billion
from around 1.2 million employers. This sum represented over 75
per cent of the total tax and national insurance contributions
collected by the Department in that year and accounted for a substantial
proportion of the public finances.
2. On the basis of a report by the Comptroller and
Auditor General,[1] the
Committee took evidence from the Department on the management
of this aspect of their work, including their arrangements for
detecting non-compliance and the measures taken to help and encourage
employers to comply with the law. Our examination focussed on
the identification of non-compliant employers; the conduct of
investigations; the promotion of voluntary compliance, including
the use of penalties; and action being taken to minimise the administrative
burden on business. Since our examination, the Government have
announced that the Contributions Agency, which carries out similar
work to check whether employers are complying with national insurance
legislation, will be transferred to the Inland Revenue from April
1999.[2] This will enable
businesses to deal with one organisation about the tax and national
insurance contributions they collect from their employees and
should help ease the burdens of compliance.
3. Employer compliance reviews provide vital assurance
that the PAYE system is operating as intended and that employers
are reporting expenses and benefits taxable under Schedule E.
In recent years, the reviews have become increasingly successful.
On the basis of the Committee's examination, however, it is clear
that the Department could improve them further by:
- making more effective use of information technology,
since, although employer compliance reviews have existed in some
form or other since 1947, staff still lack access to a national
database of employers to help them target those trades and employers
most likely to be non-compliant and to help them plan and carry
out their work cost-effectively;
- making better use of their management information
to establish why some compliance teams seem to be more efficient
and effective than others; and why, for example, the average yield
per member of staff varied from a little over £100,000 in
South West Region to over £300,000 in North West Region.
These improvements would provide assurance that employers
were being treated equitably and that this important work was
being carried out cost effectively to common standards.
4. Our more specific conclusions and recommendations,
which underpin the general views above, are as follows:
On the identification of non-compliant employers
(i) The Committee is concerned at the wide disparity
in the success of the Department's Local Employer Compliance Units,
which review smaller businesses, in identifying non-compliant
employers. In Scotland, for example, the proportion of compliance
reviews where an irregularity was detected ranged from under 40
per cent to over 90 per cent. The Department have set up a review
to look into these differences, and we look to them to implement
recommendations on best practice (paragraph 16).
(ii) We also expect the Department to exercise close
oversight over their Regional Offices' work to monitor such variations
in performance, and we expect them to take prompt corrective action
where these differences are due to shortcomings in the way Units
select and conduct cases (paragraph 17).
(iii) In spite of a successful trial with a simple
employer database in two of their Local Employer Compliance Units
which yielded increased tax of £315,000 in one Unit (139 per
cent) and £132,000 (50 per cent) in the other, compared with
a 25 per cent increase nationally, the Department decided that
extending the database to all Units would have conflicted with
their information technology strategy and would have diverted
staff from higher priority work. We consider that the Department
should have examined a lot more thoroughly the costs and benefits
of extending the database, pending the introduction of their new
employer compliance computer system, and in particular the potential
loss of tax from not doing so (paragraph 18).
(iv) The Department argued that a great deal of any
tax that might have been lost from not extending the simple database
to all Units could be recovered later because they might identify
the same employer for review in the future and recover unpaid
tax for earlier years. In our view, however, this remains to be
demonstrated, and we consider that the database could still have
been a worthwhile interim measure with a significant payback in
terms of additional tax yield (paragraph 19).
(v) It is disturbing, especially in the light of
the Department's decision not to extend the experimental database,
that their new employer compliance computer system will not be
fully effective until around 2001, that costs have increased by
some £5 million, and that net savings are now around £1
million less than originally anticipated (paragraph 20).
(vi) It is also surprising that the Department's
business case for the new employer compliance computer system
did not include at least a broad estimate of the amount of additional
yield that might be expected. The Committee recognises the difficulty
of making such estimates, but expect the Department to include
them wherever possible in future investment appraisals (paragraph
21).
(vii) The Committee is concerned at the potential
loss of tax, possibly £6 million in 1995-96, resulting from
unproductive referrals from the Contributions Agency. We note
the recent decision to transfer the Contributions Agency to the
Inland Revenue and expect the Department to use the new opportunities
provided by the transfer to build on the work currently being
carried out by both organisations to improve the quality of referrals
and increase the tax yield (paragraph 22).
On the conduct of investigations
(viii) The Department's National Audit Groups,
which review larger businesses, achieved a return of £12
for every £1 spent in 1995-96, twice that of their Local
Employer Compliance Units. The Committee welcomes the Department's
decision to review the respective approaches of the Groups and
Units and expects the Department to ensure that the initiatives
being taken to encourage the exchange of information and best
practice are implemented as soon as possible (paragraph 30).
(ix) Benefits taxable under Schedule E amounted to
over £7 billion in 1994-95. In view of the potential amount
of tax at risk from non-compliance, it is unsatisfactory that,
until January 1998, some 13 years after Schedule E reviews began,
there were no standard checks for this aspect of employer compliance
work. The Committee expects the Department to put in place appropriate
quality assurance arrangements to ensure that the checks are carried
out (paragraph 31).
(x) Given the importance of employer compliance work,
we are concerned that the staff who do it are not required to
sit examinations after their training. The Committee therefore
welcomes the Department's decision to consider the introduction
of examinations for new reviewing officers once training is sufficiently
settled to be tested (paragraph 32).
(xi) The Department have responded positively to
staff suggestions for improving training following the National
Audit Office survey of Units. The Committee looks to the Department
to act upon suggestions where it is clear that worthwhile improvements
are possible (paragraph 33).
On the promotion of voluntary compliance
(xii) Educational visits to new employers by
employer compliance staff have not proved cost-effective and the
Department have now appointed local business advisers to be the
first point of contact for such employers. The Committee welcomes
the Department's initiatives to develop new approaches to providing
advice in response to employers' views and looks to the Department
to monitor the success of these arrangements and to take remedial
action as necessary (paragraph 43).
(xiii) The Department have identified a number of
areas where irregularities by employers are common. We look to
the Department to focus their educational efforts on these areas
and to monitor their impact on improving employer compliance (paragraph
44).
(xiv) In 1995-96, staff in the Department's East
Region were more than twice as likely to impose a penalty than
those in Northern Ireland, and staff in South West Region imposed
a financial penalty twice that imposed by staff in Scotland. These
variations in the frequency and level of penalties are disturbing.
The Department are taking various initiatives to secure greater
uniformity, including the issue of revised guidance to staff and
the provision of additional training. The Committee expects the
Department to monitor closely the impact of these measures and
to take further action as necessary to secure consistency (paragraph
45).
(xv) Penalties were imposed in only one in 10 reviews
where unpaid liabilities were found, and the average rate of the
penalty was only 14.6 per cent of the maximum that could be levied.
The Committee is concerned that the infrequent use of penalties
and their relatively low value may send the wrong signals to employers
who fail to meet their tax obligations. We therefore look to the
Department to take a consistent and strong approach to the imposition
of penalties to encourage compliance (paragraph 46).
On minimising the administrative burden on employers
(xvi) The Department began merging PAYE and Schedule
E reviews in April 1994 but they do not plan to assess the effectiveness
of the new arrangements until 1999-2000 because of lack of data.
It is surprising that, after nearly four years, the Department
do not have sufficient experience of combined working to form
a considered view of its strengths and weaknesses. We believe
an earlier review might have been beneficial (paragraph 53).
(xvii) The Government's decision to establish a single
organisation to deal with both income tax and national insurance
contributions offers the opportunity to secure a significant reduction
in the administrative burden on employers. We look to the Department
to continue also to explore the scope for further co-operation
with Customs and Excise (paragraph 54).
(xviii) It is unsatisfactory that the Department
have not reviewed the balance of staff across regions for 10 years
and have no plans to do so before 1990-2000. We expect the Department
to ensure that, in future, the deployment of staff is reviewed
more regularly to ensure fair and equal treatment of employers
(paragraph 55).
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